Issuance of Decree No. 132/2020/ND-CP

Issuance of Decree 132/2020/ND-CP replacing Decree 20/2017/ND-CP and Decree 68/2020/ND-CP

After more than three years of implementing Decree No. 20/2017/ND-CP ("Decree 20") and other amending and guiding documents such as Decree No. 68/2020/ND-CP ("Decree 68") and Circular No. 41/2017/TT-BTC ("Circular 41"), on 5 November 2020, the Government has officially issued Decree No.132/2020/ND-CP ("Decree 132") to replace Decree 20 and Decree 68 prescribing tax administration for enterprises engaged in related party transactions. This Decree is inclusive of a number of changes that have material effects on taxpayers’ compliance status with Transfer Pricing regulations in Vietnam.

Under this alert, Grant Thornton Vietnam would like to update some critical changes and noteworthy points in Transfer Pricing regulations under Decree 132 regarding the preparation of Transfer Pricing dossier at the Company, specifically as below:

1. Narrowing the arm’s length range for prices of related party transactions

During the effective period of Decree 20 and its related guiding documents as well as other previous regulations, the statistical probability method applying the interquartile range function, which ranges from the 25^th percentile to 75^th percentile, was used to determine the arm’s length range for related party transactions.

Under Decree 132, the arm’s length range is now defined as to be from the 35^th percentile to the 75^th percentile. Specifically, the lower threshold has increased from the 25^th percentile to 35^th percentile.

2. Adding more subjects to be regarded as related parties

In comparison with the provisions of Decree 20, Decree 132 has supplemented the following subjects to be identified as related parties:

• Both enterprises are managed or controlled in terms of their personnel, financial and business activities by individuals, each of whom is in one of the following relationships with the others such as […], stepfather, stepmother, parents-in-law; […], stepchild of wife or husband, daughter-in-law, son-in-law; […] brothers, sisters of the same father but different mother, brothers, sisters of the same mother but different father, brothers-in-law, brother-in-law, sister-in-law, sister-in-law of a person of the same parent or of the same father, different mother or of the same mother, different father;
• The enterprise enters in transactions of transfering or receiving at least 25% of the contributed capital of the enterprise in the tax period; borrowing, lending at least 10% of contributed capital of the owner at the time of transactions in the tax period with the individuals who are managaing or controlling the enterprise or with the individuals fall into the regulations as prescribed in point g of this clause.

3. Expanding the concept of Commercial Database

Decree 132 has expanded its information source for collecting financial and economic data used in benchmarking analysis to commercial databases provided by information business organizations with data that is retained, standardized and updated.

Previously, the data sources were limited to databases provided by information business organizations extracted from publicly available sources.

4. Provisions relating to Country-by-Country reports

Clause 5, Article 18, Decree 132 has included new provisions relating to the preparation and retaining of Country-by-Country reports, specifically as follows:

• As for the deadline for submission of Country-by-Country reports in case the taxpayer is the Ultimate Parent Company in Vietnam (with consolidated revenue being over VND18,000 billion): 12 months after the end of the fiscal year of ultimate parent company (Clause 5a).
• Additional provisions on Country-by-Country reports requirement in case the Ultimate Parent Company is required to submit this Report in its country of residence (Clauses 5b and 5c) and the cases of tax authorities carrying out automatic information exchange as committed in International Agreements.
• For taxpayers whose Ultimate Parent Company is not required to submit Country-by-Country reports according to the regulations of its country of residence, provisions under international tax treaties shall be followed.

However, at the present time, the provisions relating to taxpayers' obligations regarding the Country-by-Country reports still need further clarification. We will update more on this content in case the tax authority issues more detailed guidance.

5. Deadline for provision of Transfer Pricing Documentation as required by the tax authority during tax audits and inspections

According to Decree 132, the deadline for provision of Transfer Pricing Documentation as required by the tax authority during tax audits and inspections shall be determined in accordance with the provision under the Law on Inspection.

6. Regulations on deductible interest expenses

Inheriting the provisions of Decree 68, Decree 132 regulates the cap for deductible interest expenses for businesses engaged in related party transactions to be at 30% of net EBITDA as well as other specific provisions on carrying forward non-deductible interest expenses or the retroactive application for the period of 2017-2018.

Please refer to our updates in the previous newsletter regarding Decree 68 for more details.

7. Effective date

Decree 132 takes effect on 20 December 2020 and is applied for the tax period of 2020 onwards. However, it remains unclear on how Decree 132 will be implemented for enterprises applying the fiscal year not coinciding with the calendar year, being the  fiscal year ending within calendar year 2020.

Grant Thornton Vietnam’s recommendations:

Your companies may take note to:

• Review the companies’ business models and update latest regulations under Decree 132 in order to ensure the tax compliance and mitigate tax risk.
• Review the key elements of your Transfer Pricing dossier such as Transfer Pricing method, arm’s length range, comparability analysis, etc. to ensure that your enterprise is being compliant with the new compliance requirements (e.g. new regulations on arm’s length range).
• Review the calculation of interest expense in 2017-2019 and prepare proper CIT return amendment(s) (if any) prior to 1 January 2021.

In case there is any adjustment required and/or any further concern regarding such new regulations, please contact your tax advisor for immediate asssistance.